Expanding ESG to include resilience
Expanding ESG to include resilience
The business sector has faced numerous complications over the past few years, ranging from the COVID-19 pandemic to increasing weather disasters to widespread social movements calling for change. These difficulties are compounded by investor, government, and stakeholder demands that companies operate more sustainably and contribute to solving complex issues such as the climate crisis and the need for greater diversity in the workforce.
Businesses and investors are turning to ESG (Environmental, Social, Governance) frameworks to help them manage these complex concerns. ESG frameworks are instruments that help measure and monitor company activities and metrics that aren't found on a typical balance sheet but can significantly impact a company's bottom line.
However, given the increasing frequency of upheavals, ESG metrics may require an extra dimension to assess firms' ability to effectively recover, adapt, and expand in the face of shocks and stress: resilience.
Embedding resilience in ESG
In the finance world, resilience isn't a new concept; it often refers to a lack of sensitivity to risks, shocks, and changing events. But resilience is more than just a catch-all term for fortitude. Resilience refers to a company's ability to absorb shock and emerge stronger and more relevant from a catastrophe than before. Organizations must incorporate ESG elements into their risk management functions to achieve this level of resilience. When correctly integrated, ESG considerations can assist in identifying important threats to long-term sustainability & implementing the solutions required to deal with unexpected events.
Building environmental resiliency
The climate crisis is altering our way of living and working. Last year, the Earth was hit by $145 billion in weather-related disasters, making 2021 the third most costly year on record. Climate change, according to insurer Swiss Re, could cost the global economy $23 trillion by 2050. According to the International Labour Organization, if rising temperature predictions come true, 80 million jobs will be in jeopardy, with productivity being hampered by unlivable working conditions.
Almost all industries are threatened by the effects of climate change, either directly or indirectly. One study has shown that the U.S. alone could lose $520 billion across 22 sectors due to global temperature rise.
Companies and investors can utilize ESG frameworks to collect metrics on carbon emissions, climate change vulnerability, water sourcing, biodiversity and land usage, hazardous emissions and waste, packaging material and waste, and electronic waste, among other things. Addressing climate risks, on the other hand, necessitates adding another letter to ESG: “R”, which stands for Resilience.
Understanding and managing climate hazards and their cascading impacts on organizations and communities are key components of corporate environmental resilience. Whether it’s safeguarding water sources or understanding how a disaster might affect various supply chains, organizations are responsible for identifying the previously “unknown unknown” variables of a disaster event.
However, many of today's environmental measures fail to account for future challenges. The foundation for resilience must be a data-driven awareness of the present and future climate threats. Increased private-public sector collaboration, improved data access, better use of technology to predict climate threat scenarios, and transparent and accurate risk disclosures will be required to achieve this goal.
Building social resiliency
Employee treatment, safety violations, and product recalls are all examples of ESG social aspects. These concerns are broad and qualitative, and they frequently affect all of a company's stakeholders at the same time, from employees and customers to suppliers and local communities. Maintaining healthy, positive, fair, and ethical relationships with these stakeholders is crucial to a company's performance, especially if that company's success is dependent on public trust.
To build social resilience, companies must understand their full scope of social risks, including diversity, equity, and inclusion, customer satisfaction, data protection and privacy, employee engagement, community relations, wage equality, labor standards, human rights, working and safety conditions, training and workforce development, and ethical supply chain practices.
In a crisis like the COVID-19 outbreak, social measures, like environmental, do not assess the commercial risks of workforce vulnerability. However, it has been demonstrated that the resilience of all stakeholders associated with a corporation lies in determining whether health and social protections can endure future crises.
The bad news is that all signs point to more business and financial uncertainty in the coming years. Every 3.7 years, according to McKinsey & Company, organizations could encounter supply chain interruptions lasting at least a month, with many taking a major toll on revenues.
The good news is that businesses that prioritize health and safety, labor-management relations, human rights, and product integrity may establish social resilience today, which can help mitigate future risks. Other beneficial social outcomes include increased productivity and morale, lower turnover, and improved brand loyalty, making this a win-win situation for businesses and communities.
Building governance resiliency
Corporate integrity and ethics, tax strategy and compliance, executive remuneration, donations and political lobbying, corruption and bribery, and board diversity and structure are all issues covered within governance. But organizational resilience is key to a company's long-term survival. It's a comprehensive strategy for ensuring the organization's ability to function following a disaster. It also entails operational resilience activities directed and defined by the company's leaders, which must extend far beyond disaster recovery.
Leadership teams must navigate industry-specific compliance and regulations, consider the role of the board of directors in overseeing sustainability risk management policies, develop sound risk management and internal controls, determine what public and investor disclosures are required, and provide guidance for best decision-making and resource allocation.
ESG concerns are increasingly being considered in boardrooms, with many companies seeking more board oversight and management responsibilities for business-relevant ESG issues. Because there is no "one-size-fits-all" approach to allocating ESG oversight responsibilities, how board oversight is carried out at any given company is dependent on specific company circumstances, such as existing company processes and practices relating to the oversight of the enterprise risk management program; ESG-related functional areas; and the importance of specific ESG issues to the company.
To develop a successful resilience strategy, organizations must go beyond routine compliance to identify high-impact risks to assets, infrastructure, operations, and service delivery in the short, medium, and long term.
Understanding your ESG risks
Businesses and investors will be ill-equipped to recover from the crises that will certainly occur in the future unless they adopt an impactful ESG policy. And resilience is the key overlay to an effective ESG strategy.
Companies must comprehend the entire breadth of ESG risks to their business and anticipate the "unknown unknown" to completely withstand systemic shocks and build resilience. ESG risks exist outside of a traditional financial audit, but they are equally significant to a business. A company that ignores sustainability issues risks incurring significant financial penalties as well as losing investors, consumers, and stakeholder support.
ESG disputes can have a significant detrimental influence on a company's profitability and survival if they are not addressed quickly and appropriately. Even while the cost of adaptation and mitigation is in the trillions of dollars, it is still a bargain when compared to the cost of doing nothing. As a result, it's critical for businesses to recognize and mitigate the various types of sustainability risks that exist and pose a threat to their company.
ESG materiality assessments
With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.
An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.